Swiss move sparks search for safe-haven currencies

V.Phani Kumar

NEW YORK (MarketWatch) — Faced with fewer safe-haven alternatives in the wake of the Swiss National Bank’s move to keep the franc from rising, investors might now pile into the U.S. dollar, as well as currencies that usually don’t figure on the radar of those avoiding risks.

Such alternatives could include the Canadian and Australian dollars, the Swedish krona and the Norwegian krone — currencies that usually tend to rise in value when an improving global economy spurs risk-taking, and drop during bad times — say analysts.

The SNB’s decision “takes the Swiss franc off as a risk-off currency for the time-being,” said Andrew Busch, global currency and public policy strategist at BMO Capital Markets.

“It also brings the Bank of Japan or the Japanese government into the same position, where they continue to intervene by buying the U.S. dollar against the yen, taking another risk-off currency away from the market,” Busch said.

Busch and other analysts said the sovereign debt crisis in the euro zone and the resulting aversion to risk was likely to support the U.S. dollar in the near-term, although the American economy itself faced its own share of problems and was passing through an economic slowdown.

The extraordinary move to intervene in the currency markets was aimed at preventing the Swiss franc from rising further from what the SNB described as a “massive overvaluation,” prompting a swift and sharp reversal for the local unit against major global currencies. Read full currencies story.

Japan also intervened in the foreign exchange markets this year to protect the domestic economy from the ill-effects of an appreciating local currency.

These moves by Switzerland and Japan, which own currencies that are liquid in global markets and have been used as a hedge against global economic headwinds, are forcing investors to look for alternatives.

Alternatives & requirements

But not all currencies meet the requirements for a safe-haven.

Charles St-Arnaud, an economist at Nomura, said the brokerage house has identified five big factors that are essential for investors to place faith in a currency. Of those factors, macro and political stability “is very important,” he said.

“People will gradually begin to broaden their scope and see what’s out there,” he said. While the dollar, the euro and the yen have traditionally seen as the best safe-haven currencies, “at some point people will start to look elsewhere to diversify their holdings,” he added.

St-Arnaud cited the Canadian dollar
USDCAD, +0.0383%
and the Swedish krone
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as candidates, because of their relatively strong domestic economies and low inflation.

There are other criteria for treating a currency as a safe-haven.

“We like floating currencies that offer strong internal structural fundamentals, that are resilient to weaker macro data and that are consistent with the medium-term theme of a multi-polar world, accompanied by the reduced role for the [U.S.] dollar,” Lena Komileva, senior vice president and global head of G10 strategy at Brown Brothers Harriman, wrote in a report.

That favors the Norwegian krone and the Australian dollar
AUDUSD, +0.0000%
, as well as the New Zealand
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and Canadian dollars, “although the [New Zealand and Canadian dollars’] greater sensitivity to market liquidity, higher volumes and negative U.S. news will continue to impede” inflows into those currencies, Komileva said.

Even so, it would be challenging for investors to treat currencies of countries with a small domestic bond market as a potential safe-haven.

BMO Capital Markets’ Busch said that the size of Canada’s bond market could constrain investors seeking protection in the currency.

The Canadian bond market “is so significantly smaller than the U.S. or Japan that it leaves capacity constraints as a major [factor] for anyone who wants to buy Canadian dollars and in turn buy short-dated Canadian government debt,” Busch said.

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